Poonawalla Fincorp Limited (“PFL”) is a joint venture partner in Magma HDI General Insurance Limited (“Magma HDI”), a general insurance company registered with Insurance Regulatory and Development Authority of India (IRDAI). The other joint venture partners of Magma HDI include Celica Developers, Jaguar Advisory and HDI Global SE.
IRDAI “Registration of Insurance Companies Regulations” stipulate that a promoter of an insurance company cannot be a subsidiary of another company. Post the acquisition of PFL by Rising Sun Holdings Private Limited (“RSH”) in May 2021 PFL has become a subsidiary of RSH. Accordingly, IRDAI has sought compliance from Magma HDI regarding its shareholding structure.
The Board of Directors having evaluated alternative options, and with a view to remain compliant with Regulatory requirements of Reserve Bank of India and IRDAI, has approved divestment of the Company’s direct and indirect shareholding in Magma HDI.
Sanoti Properties LLP, which is held by Adar Poonawalla and Serum Institute of India Private Limited; has agreed to acquire the direct and indirect stake of the Company in Magma HDI. This structure is in line with other financial services groups with NBFC and general insurance operations and will also allow a framework for continued business relationship between PFL and Magma HDI.
As part of the divestment, PFL will also divest its of 48.89% shareholding in Jaguar Advisory, which consequent to the above transaction of divestment in MHDI shares will own only cash and cash equivalent, to Celica Developers, the joint venture partner in Jaguar Advisory.
In addition to complying with the sector Regulators requirements, the divestment is in line with PFL’s strategy to focus on the core lending business. By monetising the investment in Magma HDI, the Company will have full capital allocation to its core lending businesses. The proposed transactions will result in a pre-tax profit of Rs. 351.85 crores for PFL and sale of stake will result in an effective increase in Tier 1 capital adequacy ratio from 52.2% to 56.1% .
The valuation for the transaction is proposed to be at a post-money valuation of Rs 1,500 crore for Magma HDI (including the proposed equity issuance of Rs 250 crore by Magma HDI announced in March 2021, presently awaiting Regulatory approvals). Magma HDI has received a valuation report for the same from Corporate Professionals Valuation Services Private Limited, Registered Independent Valuer and PFL has a received a fairness opinion on the same from Ernst & Young Merchant Banking Services LLP . Wadia Ghandy & Co is acting as the legal advisor to PFL.
The proposed transaction is subject to the approval of the minority shareholders of PFL, and Regulatory approvals including from IRDAI and the Competition Commission of India.
Commenting on the proposed transaction, Vijay Deshwal, Group CEO Poonawalla Fincorp said “With a view to remain compliant with the sector regulator’s requirements and the vision to create a high RoE business, Poonawalla Fincorp had decided to exit its shareholding in Magma HDI. The monetisation of our stake in Magma HDI reinforces our strategic intent to allocate capital to our core lending business. We shall continue to derive synergies of the group companies and strengthen our business relationship with Magma HDI to generate fee income through effective cross sell of insurance products for our customers.”
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